Construction Engineering 221 Economic Analysis Alternate Selection Construction Engineering 221 Economic Analysis

Alternate Selection Ranking multiple projects when funds are sufficient to invest in more than one choice Various ranking methods- Largest present worth (NPV) descending Lowest annual cost ascending Smallest capitalized cost ascending Can use ROR to order, but need to then do an incremental analysis

Alternate Selection Incremental analysis Calculate the rate of return on the additional investment Start by ordering all investments that exceed MARR in order of increasing initial cost Cash flow from least cost option is subtracted from cash flows for higher priced option Additional cash flow is compared to additional investment and tested against MARR

Alternate Selection If all incremental rates or return exceed MARR, select option(s) with highest initial investment Can be used in a similar way with Cost-Benefit ratios, but is seldom done

Alternate Selection If alternatives have different lives, must consider the length of use (analysis horizon) and not the life of the asset. If asset use is completed before life is used up, must know the disposition (salvage) value If asset life will not extend to asset use, then must know replacement schedules

Alternate Selection Multiple asset lives are just series of present value calculations set to equivalent use periods Infinite horizon problems are just capitalized cost problems Different lived assets require only minor adaptation from the types of problems we have done so far- must incorporate a salvage (P/F) or renewal (F/A*P/F) factor